Efforts to Reduce SPR Are Misguided

Last week, as part of a bipartisan budget package, Congress approved the sale of 100 million barrels from the Strategic Petroleum Reserve (SPR) in order to generate revenue to pay for a small portion of the budget’s costs.

The agreement is part of a worrisome trend of using non-emergency sales from the SPR to pay for programs unrelated to energy security. In the past several years, Congress has authorized sales from the SPR to fund a number of projects, from medical research to transportation. When including the latest budget agreement, authorized sales will reduce the SPR’s volumes by approximately 300 million barrels, or almost 45 percent, by 2027. The one positive in the series of SPR sales is the effort to raise money to modernize the reserve.

When including the latest budget agreement, authorized sales will reduce the SPR’s volumes by approximately 300 million barrels, or almost 45 percent, by 2027.

“The SPR is only effective if it can get its petroleum to market quickly and efficiently in the event of a supply emergency,” SAFE’s CEO Robbie Diamond said. “Geopolitical risk is alive and well in the oil market, and the SPR is America’s only formal short-term line of defense against oil supply disruptions and price spikes.”

Critics of the SPR say it is no longer useful because of relatively low gasoline prices, a sharp decline in net imports of petroleum, and the rise of shale production. But that is a false narrative. Dealing with the country’s energy security vulnerabilities requires sustained and targeted involvement by the federal government. The SPR, set up in 1975 in the aftermath of the Arab Oil Embargo, plays an important role in insulating the U.S. economy from a volatile and unpredictable global oil market by bringing oil to market quickly in the event of a global supply emergency. It has also played a role in reducing negative effects of severe weather events, as evidenced after Hurricane Harvey hit the Gulf Coast last year.

As we noted last week, the surge of U.S. production to above 10 million barrels per day (Mbd) does not resolve the country’s energy security dilemmas. The U.S. still consumes 20 percent of the world’s oil and imports approximately 45 percent of its crude needs. Furthermore, shale oil production cannot be counted on to rise indefinitely.

Even if the U.S. continues to produces more oil for the foreseeable future, it will remain dependent on the global market for decades to come.

Even if the U.S. continues to produces more oil for the foreseeable future, it will remain dependent on the global market for decades to come. Spare capacity in the global oil markets is low, geopolitical risks continue, and the U.S. economy is still affected by international price increases. In fact, the levels of geopolitical volatility (see Venezuela, Iran, Iraq, and Russia) remain high enough to make the case that the SPR is as significant today as it has been in the past.

With demand rising globally and limited investment in long-term upstream projects, the likelihood of a tighter market next decade is increasing. In that case, the SPR will be needed to serve as an important security buffer to counter supply losses or major oil producers, particularly those in OPEC, exploiting their market power.

It is important that we take advantage of the country’s current energy boom, but we cannot forget that vulnerabilities still remain. If demand continues to grow and domestic production peaks and then falls, we may return to where we were before the shale boom started—overly reliant on imports, including volumes from unstable producers. Moving forward, there needs to be a vigorous debate about the SPR’s size and role before any more changes are made.

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The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

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DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.